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| FUL > SEC Filings for FUL > Form 10-Q on 1-Jul-2009 | All Recent SEC Filings |
1-Jul-2009
Quarterly Report
Overview
The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended November 29, 2008 for important background information related to the business.
The depressed global economic conditions continued to have a significant impact on the 2009 financial results. Weak end-market demand led to a net revenue decrease of 16.1 percent in the second quarter of 2009 as compared to the second quarter of 2008. Each of the four operating segments experienced sales volume declines in the quarter in excess of 10 percent as compared to last year. Currency effects contributed a negative 6.6 percent to the net revenue variance compared to 2008. Decreases in raw material prices combined with selling price discipline resulted in an improved gross profit margin of 29.9 percent, which compared to the second quarter of 2008 of 26.7 percent. This also represents a 3.0 percentage point improvement from the 26.9 percent recorded in the first quarter of 2009. Net income for the quarter of $17.6 million was 17.8 percent below the second quarter of 2008 and the diluted earnings per share (EPS) of $0.36 was 12.2 percent less than the $0.41 per share recorded in the second quarter of 2008.
Through the first six months of 2009 net revenue decreased 15.0 percent and net income decreased 40.2 percent from the first six months of 2008. The diluted EPS for the first six months of 2009 was $0.48 as compared to $0.72 in the first six months of 2008.
The second quarter and first six month diluted EPS figures were aided by a 5.6 percent and 10.5 percent reduction, respectively, in the weighted average number of diluted shares resulting from our share repurchase programs that began in the third quarter of 2007 and ended in the second quarter of 2008.
Certain changes as described below were made to the components of our operating segments during the first quarter of 2009. Prior year amounts were also reclassified to conform to the current year organization structure.
• The packaging solutions reporting unit that previously was reported entirely in the North America segment has been broken out into all four operating segments. The reporting unit has historically had international revenue and expenses however it was managed centrally in North America. The reporting unit is now managed on a regional basis and incorporated into the adhesives reporting units of each of the segments
• In the North America operating segment, in addition to the packaging solutions changes discussed above, the adhesives reporting unit also includes the insulating glass business activities that were previously reported as a separate reporting unit. The insulating glass activities are now integrated into the adhesives management structure and managed as a product line within the adhesives group. Therefore, the North America operating segment now consists of two components: adhesives and specialty construction.
• The Europe operating segment has been renamed to EMEA (Europe, Middle East and Africa). We believe this name is more representative of the business activities of the segment, especially after the 2008 Egymelt acquisition. No other changes to this segment other than the addition of the packaging solutions activities related to Europe.
• In Asia Pacific, the consumer reporting unit has been integrated into the adhesives management structure resulting in the Asia Pacific operating segment having only one reporting unit.
Net Revenue:
We review variances in net revenue in terms of changes related to product pricing, sales volume, acquisitions and changes in foreign currency exchange rates. The following table shows the net revenue variance analysis for the second quarter and first six months of 2009 compared to the same periods in 2008:
13 Weeks Ended 26 Weeks Ended
( ) = Decrease May 30, 2009 May 30, 2009
Product pricing 5.0 % 5.7 %
Sales volume (15.1 )% (15.3 )%
Currency (6.6 )% (5.9 )%
Acquisitions 0.6 % 0.5 %
Total (16.1 )% (15.0 )%
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Organic sales growth, which we define as the combined variances from product pricing and sales volume, was a negative 10.1 percent (negative 15.1 percent from sales volume and positive 5.0 percent from selling prices) in the second quarter of 2009 as compared to the same period last year. Organic sales growth was a negative 9.6 percent (negative 15.3 percent from sales volume and positive 5.7 percent from selling prices) in the first six months of 2009 as compared to the same periods last year. The slow economy continued to have a negative impact on sales volume in the second quarter and first six months. The negative currency effects resulted from the strengthening of the dollar against most major foreign currencies as compared to the first half of 2008. The negative currency effects resulted primarily from the Euro, Australian dollar and Canadian dollar. The net revenue variances from acquisitions were due to the Egymelt acquisition that closed in the fourth quarter of 2008 and the acquisition of Nordic Adhesive Technology during the second quarter of 2009.
Cost of Sales:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Cost of sales $ 209.8 $ 261.5 (19.8 )% $ 413.4 $ 492.7 (16.1 )%
Percent of net revenue 70.1 % 73.3 % 71.5 % 72.5 %
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The cost of sales decreased 19.8 percent from the second quarter of 2008 and 16.1 percent compared to the first six months of 2008. The decrease was driven primarily by the 15.1 percent and 15.3 percent decline in sales volume for the second quarter and first six months, respectively. Raw material costs decreased in the second quarter and first half of 2009 as compared to the same periods of 2008. Manufacturing costs decreased due to headcount reductions and other cost containment measures in response to the lower sales volume. The stronger U.S. dollar in the second quarter and first six months of 2009 as compared to the same periods in 2008 also contributed to the decrease in the cost of sales.
Gross Profit Margin:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Gross profit $ 89.4 $ 95.2 (6.1 )% $ 164.4 $ 186.7 (12.0 )%
Percent of net revenue 29.9 % 26.7 % 28.5 % 27.5 %
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The higher gross profit margin for both the second quarter and first six months of 2009 as compared to the same periods in 2008 was driven primarily by the combination of lower raw material costs and management of our selling prices. Average selling prices increased 5.0 percent and 5.7 percent for the second quarter and first six months of 2009, respectively, as compared to the same periods in 2008.
Selling, General and Administrative (SG&A) Expenses:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
SG&A $ 61.5 $ 62.8 (2.0 )% $ 124.1 $ 127.8 (2.9 )%
Percent of net revenue 20.6 % 17.6 % 21.5 % 18.8 %
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SG&A expenses decreased $1.3 million from the second quarter of 2008 and $3.7 million from the first six months of 2008. Strict spending controls and the effects of currency exchange rates both contributed to the decrease in SG&A expenses. The increase in SG&A expenses as a percent of net revenue for both the second quarter and first six months of 2009 was a direct result of the lower net revenue levels. The SG&A expenses are generally fixed in nature over the short term and therefore, do not fluctuate as rapidly as the net revenue figures.
Goodwill impairment charges:
13 Weeks Ended 26 Weeks Ended May 30, May 31, 2009 vs May 30, May 31, 2009 vs ($ in millions) 2009 2008 2008 2009 2008 2008 Goodwill impairment charges - - - $ 0.8 - NMP
NMP = Non-meaningful percentage
In the fourth quarter of 2008 an $85.0 million impairment charge was taken as a reduction of the goodwill balance of the specialty construction reporting unit. This amount was considered an estimate as of November 29, 2008 with final valuation work to be completed in the first quarter of 2009. The additional charge of $0.8 million in the first quarter of 2009 was the result of the final valuation work. There were no additional charges in the second quarter of 2009.
Other Income (expense), net:
NMP = Non-meaningful percentage
Interest income was $0.4 million in the second quarter of 2009 and $1.5 million in the second quarter of 2008. Interest income was $0.7 million in the first half of 2009 and $3.4 million in the first half of 2008. The lower average cash balance in the first six months of 2009 as compared to 2008 was the primary reason for the lower interest income however lower interest rates also contributed to the decrease. Currency transaction and re-measurement losses in the second quarter 2009 were $1.4 million as compared to losses of $0.7 million in the second quarter of 2008. Currency transaction and re-measurement losses in the first six months of 2009 were $2.4 million as compared to losses of $1.0 million in the first six months of 2008. Fluctuations in currency exchange rates during the first six months of 2009 combined with changes in foreign currency exposures were the main reasons for the higher losses in 2009 as compared to last year.
The year-over-year decrease in the interest expense was due to the lower average debt balance and lower interest rates in 2009 as compared to 2008.
Income Taxes:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Income taxes $ 8.1 $ 8.3 (3.5 )% $ 11.1 $ 15.6 (28.9 )%
Effective tax rate 33.0 % 28.4 % 34.0 % 28.7 %
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The higher effective tax rate in the second quarter and first six months of 2009 as compared to the same periods in 2008 was primarily due to an unfavorable geographic mix of pretax earnings.
Minority Interests in Loss of Subsidiaries:
Minority interests in the losses in our 80 percent owned China entities were not significant in the second quarter or first six months of either 2009 or 2008.
Income from Equity Investments:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Income from equity investments $ 1.1 $ 0.4 215.1 % $ 2.1 $ 0.8 149.0 %
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The income from equity investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan. The second quarter and first six months results reflected the higher net income recorded by the joint venture in the same period of 2008 due mainly to stronger gross profit margins.
Net Income:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Net Income $ 17.6 $ 21.4 (17.8 )% $ 23.7 $ 39.6 (40.2 )%
Percent of Net Revenue 5.9 % 6.0 % 4.1 % 5.8 %
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The decrease in net income in the second quarter and first six months of 2009 as compared to 2008 was driven primarily by the lower sales volume in 2009 as compared to 2008. The diluted EPS was $0.36 for the second quarter of 2009 and $0.41 for the second quarter of 2008 and $0.48 for the first six months of 2009 and $0.72 for the first six months of 2008. The weighted-average number of diluted shares for the second quarter of 2009 was 5.6 percent lower than the second quarter of 2008 and 10.5 percent lower for the first six months of 2009 compared to the same period last year due to our stock repurchase programs that ended in the second quarter of 2008.
Our operations are managed through the four primary geographic regions: North America, EMEA, Latin America and Asia Pacific. Region Vice Presidents report directly to the Chief Executive Officer and are accountable for the financial results of their entire region. See the Overview section of this report for changes made in the first quarter of 2009 related to the reporting units within the operating segments.
The tables below set forth certain information regarding the net revenue and operating income of each of our operating segments. Operating income is defined as gross profit less SG&A expenses.
Net Revenue by Segment:
13 Weeks Ended 26 Weeks Ended
May 30, 2009 May 31, 2008 May 30, 2009 May 31, 2008
Net % of Net % of Net % of Net % of
($ in millions) Revenue Total Revenue Total Revenue Total Revenue Total
North America $ 135.3 45 % $ 154.7 43 % $ 254.5 44 % $ 289.0 43 %
EMEA 85.6 29 % 113.1 32 % 164.4 29 % 215.5 32 %
Latin America 50.5 17 % 54.6 15 % 105.9 18 % 111.6 16 %
Asia Pacific 27.8 9 % 34.4 10 % 53.0 9 % 63.3 9 %
Total $ 299.2 100 % $ 356.8 100 % $ 577.8 100 % $ 679.4 100 %
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Operating Income (loss) by Segment:
13 Weeks Ended 26 Weeks Ended
May 30, 2009 May 31, 2008 May 30, 2009 May 31, 2008
Operating Operating
Income % of Operating % of Income % of Operating % of
($ in millions) (loss) Total Income Total (loss) Total Income Total
North America $ 20.1 72 % $ 16.4 51 % $ 29.9 74 % $ 30.3 51 %
EMEA 6.3 23 % 11.2 34 % 8.2 20 % 20.4 35 %
Latin America 2.0 7 % 2.0 6 % 2.8 7 % 3.7 6 %
Asia Pacific (0.5 ) (2 )% 2.8 9 % (0.6 ) (1 )% 4.5 8 %
Total $ 27.9 100 % $ 32.4 100 % $ 40.3 100 % $ 58.9 100 %
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The following table provides a reconciliation of operating income to income before income taxes, minority interests and income from equity investments, as reported on the Consolidated Statements of Income.
13 Weeks Ended 26 Weeks Ended
May 30, May 31, May 30, May 31,
(In millions) 2009 2008 2009 2008
Operating income from continuing
operations $ 27.9 $ 32.4 $ 40.3 $ 58.9
Goodwill impairment charges - - (0.8 ) -
Other income (expense), net (1.3 ) 0.8 (2.3 ) 2.1
Interest expense (2.2 ) (3.9 ) (4.6 ) (6.8 )
Income before income taxes, minority
interests, and income from equity
investments $ 24.4 $ 29.3 $ 32.6 $ 54.2
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North America:
The following table shows the net revenue generated from the key components of
the North America segment.
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13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Adhesives $ 105.2 $ 115.9 (9.2 )% $ 198.2 $ 219.0 (9.5 )%
Specialty Construction 30.1 38.8 (22.4 )% 56.3 70.0 (19.6 )%
Total North America $ 135.3 $ 154.7 (12.5 )% $ 254.5 $ 289.0 (11.9 )%
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The following tables provide details of North America net revenue variances by segment component. The Pricing/Sales Volume variance is viewed as organic growth.
13 weeks ended May 30, 2009 vs 26 weeks ended May 30, 2009 vs
May 31, 2008 May 31, 2008
Specialty Specialty
( ) = Decrease Adhesives Construction Total Adhesives Construction Total
Pricing/Sales Volume (7.6 )% (22.4 )% (11.3 )% (7.8 )% (19.6 )% (10.6 )%
Currency (1.6 )% - (1.2 )% (1.7 )% - (1.3 )%
Total (9.2 )% (22.4 )% (12.5 )% (9.5 )% (19.6 )% (11.9 )%
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The following table reflects the operating income by component of the North America operating segment:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Adhesives $ 19.2 $ 14.9 28.3 % $ 31.0 $ 28.8 7.5 %
Specialty Construction 0.9 1.5 (36.6 )% (1.1 ) 1.5 (177.3 )%
Total North America $ 20.1 $ 16.4 22.5 % $ 29.9 $ 30.3 (1.5 )%
Segment profit margin % 14.9 % 10.6 % 11.7 % 10.5 %
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Note: Individual component results are subject to numerous allocations of segment-wide costs that may or may not have been focused on that particular component for a particular reporting period. The costs of these allocated resources are not tracked on a "where-used" basis as financial performance is managed to maximize the total operating segment performance. Therefore, the above financial information should only be used for directional indications of performance.
Total North America: The continued slowdown in the U.S. economy was the primary driver for net revenue declining 12.5 percent in the second quarter and 11.9 percent in the first six months of 2009 as compared to the prior year. Construction-related markets continued to be very weak compared to last year. Sales volume for the second quarter decreased 18.4 percent while average selling prices were 7.1 percent above the second quarter of last year. For the first six months, sales volume decreased 17.6 percent while average selling prices were 7.0 percent above the same period last year. The increase in average selling prices resulted from pricing actions taken in the second half of 2008 in response to the escalation in raw material costs. During the first half of 2009 raw material prices declined resulting in an increase in the gross profit margin as compared to 2008. The improved margin combined with disciplined spending in the SG&A expenses resulted in the second quarter operating income increasing 22.5 percent over the second quarter of 2008. Through six months of 2009 the operating income was 1.5 percent below the first six months of 2008.
Adhesives: Net revenue in the Adhesives component declined 9.2 percent and 9.5 percent in the second quarter and first six months of 2009, respectively as compared to last year. Increases in average selling prices of 8.3 percent as compared to the second quarter of 2008 partially offset the 15.8 percent decrease in sales volume. Similar to the second quarter net revenue variances, for the first six months of 2009 the declines in sales volume were 16.3 percent while average selling prices increased 8.5 percent as compared to the first six months of 2008. The adhesives sales volumes were down across most major product lines and industries as a result of the slow U.S. economy. The gross profit margin improved in the second quarter of 2009 primarily as a result of the decrease in raw material prices combined with the higher average selling prices as compared to the same period in 2008. The improvement in the gross profit margin drove the increase in operating income for both the second quarter and first six months of 2009 as compared to 2008.
EMEA:
13 Weeks Ended 26 Weeks Ended
May 30, May 31, 2009 vs May 30, May 31, 2009 vs
($ in millions) 2009 2008 2008 2009 2008 2008
Net Revenue $ 85.6 $ 113.1 (24.3 )% $ 164.4 $ 215.5 (23.7 )%
Operating Income $ 6.3 $ 11.2 (43.7 )% $ 8.2 $ 20.4 (59.9 )%
Segment profit margin % 7.4 % 9.9 % 5.0 % 9.5 %
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The following table provides details of the EMEA net revenue variances. The Pricing/Sales Volume variance is viewed as organic growth.
13 weeks ended May 30, 2009 26 weeks ended May 30, 2009
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